When applying for an adjustable rate mortgage (ARM), lenders are required to provide disclosures to borrowers that include both the best and worst case scenarios. The best scenario involves providing an example of how the loan would have performed during the past 15 years, along with instructions on how to adjust it to fit the borrower’s individual situation. Meanwhile, the worst-case scenario details how the loan could perform if interest rates were to significantly increase. This information allows borrowers to make an informed decision about whether an ARM is the right choice for them.

The disclosure provides guidance on how the consumer can convert the $10,000 ARM illustration to match their own loan request. For example, if the buyer wants to borrow $100,000, the disclosure would instruct them to multiply the monthly payments by 10.

To illustrate how the loan could perform under unfavorable circumstances, the example begins with the initial rate and quickly increases to the highest possible interest rate and payment.

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